China monthly: Coal-to-olefins economics are a major challenge

05 April 2013 09:26  [Source: ICB]

From environmental factors to logistics, the obstacles that coal- and methanol-based projects face mean that much of the planned capacity is not likely to move forward

At first glance, coal-to-olefins (CTO) investments in China make a lot of sense. The country has just a 1.65% share of global natural gas reserves and 1.39% of world oil reserves compared with 13.31% for coal, according to the US-based Energy Information Administration .


 China's CTO projects are close to coal reserves in central and western China, but many plastic converters are on the eastern coast

Copyright: Getty Images

Despite a big increase in petrochemicals capacity, China still has to import substantial amounts of its requirements.

Take polyethylene (PE) as an example. Between 2005 and 2012, domestic capacity increased from 5.2m tonnes/year to 10.3m tonnes/year, according to data gathered by UK-based chemicals consultancy International e-Chem, trade data service Global Trade Information Services and ICIS. But 7.7m tonnes of PE still had to be imported in 2012 compared with 5.2m tonnes in 2005.

Central government policy, which is all-important in assessing industrial development in China, aligns with the notion that there will be a boom in CTO capacity.

Under China's 12th Five-Year Plan (2011-2015), Beijing wants to raise ethylene self-sufficiency to 64% in 2015 from 48% in 2010. The target for propylene is an increase to 77% from 63%.

One could argue that the biggest route to achieving these targets will be via oil refining, now that Sinopec and PetroChina have achieved improved levels of "virtual crude integration", thanks to new overseas oil reserves.

But demand for petrochemicals grew twice as fast as demand for refinery products between 2003 and 2012, and the trend is set to continue, said HSBC in a 20 February report.

Investments in refining purely for the sake of keeping pace with demand for petrochemicals would not make economic sense, as it would result in a significant oversupply of diesel, gasoline and other refinery products.

The economics of coal-to-methanol, then methanol-to-olefins (MTO), and finally the conversion of olefins into polyolefins make sense, said several industry sources.

Coal sells for $25/tonne in some of China's inland provinces where the country's big coal reserves are located. Coal miners can thus add a lot of value by making polyolefins that often sell for $1,500/tonne or more.

And on a variable cost basis, converting coal into ethylene competes well with the naphtha-cracking route, according to ICIS China. When raw material prices rise by 10%, the variable costs of naphtha-based ethylene production increase by 20%, whereas coal-based costs rise by only 7%, according to a 2012 ICIS China report on CTO.

Financing projects had not been an obstacle for the big, politically well-connected companies involved in many of the CTO projects, added the industry sources. Their strong relationships with state-owned banks had guaranteed ample and cheap funding, they said.

The financial stability helps explain the huge amount of project activity. Some project proponents are planning coastal facilities that will import methanol for conversion into olefins and then polyolefins. By 2017, more CTO and stand-alone MTO capacity is due on stream in China than shale-gas based olefins in the US, said HSBC in the same report.

Early last year, only three out of 46 projects had secured final central government approval, but by this February, the number had risen to eight, said ICIS China.

However, logistical problems are a significant impediment. Many CTO projects are located in central and western China, in order to be close to the big coal reserves.

Yet the nation's plastic converters are mostly found in eastern China, "with the top four provinces [Guangdong, Zhejiang, Guangxi, Shandong] accounting for 50% of the production of plastic products in China", added the HSBC report.

"The mismatch between the plastic producing regions of eastern China and the CTO projects in central and western China leads to the issue of transporting the CTO-produced olefins/polyolefins and co-products to eastern China. "

The stumbling block is not transporting polymers, said HSBC. While the cost of shipping resin to eastern China is high, it is still less than moving coal, given that it takes 6.2 tonnes of coal to make one tonne of olefins, added the bank.

"The co-products, on the other hand, are a different story. The main co-products include fuel gas, heavier olefins and gasoline, and are produced in much smaller in quantities than the olefins," continued the report.

It said total co-product yields for the MTO/methanol-to-propylene (MTP) processes are only 7% and 11%. "The smaller quantities of the co-products produced, coupled with the far-off location of the coal-to-chemicals plants, makes it difficult for these products to be sold at their normal market prices."

HSBC said that the co-products, as a result, are either sold at a discount to market prices or are consumed internally as fuel, realising their fuel-linked value only.

Coastal MTO projects, which would be based on imported methanol, were also not viable because of the amount of methanol required, said HSBC.

"A 600,000 tonnes/year MTO/MTP project requires 1.8m-2.16m tonnes/year of methanol, which is significant in size compared to average annual Chinese methanol imports of 5.3m tonnes/year since 2009," the report added.

Well-documented environmental challenges are also a major barrier to investment.

For instance, 15-20 tonnes of fresh water are required to produce each tonne of olefins via CTO, compared with 0.8 to 2.17 tonnes of water needed for each tonne of crude oil processed through an oil refinery.

Per capita water resources and water resources per square metre in the provinces of Inner Mongolia, Shanxi and Shaanxi, where many of the CTO projects are located, were only 1/10th of the national average, said an August 2012 report by Greenpeace and the Chinese government's Geographical Sciences and Natural Resources Institute.

High carbon dioxide emissions are another problem highlighted by HSBC. The CTO process generates a low of 7.1 tonnes of CO2 for every one tonne of olefins produced and a high of 10.6 tonnes, said the bank. This is compared with just 1.5-3.0 tonnes of CO2 per tonne of ethylene via naphtha cracking.

In addition to these environmental concerns, the central government is also eager to prevent a repeat of excessive investment in subscale coal-to-chemical plants, said HSBC.

Numerous small-scale - and therefore uneconomic - coal-based polyvinyl chloride (PVC) plants were built during the last decade. "To this end, the National Development and Reform Commission (NDRC) [China's highest administrative body] has oversight of all coal-to-chemicals project approvals and has set minimum scale guidelines in order to ensure viability," continued the report.

"Under the new rules announced in the 12th Five-Year Plan for coal-to-chemicals, a coal-based olefins plant must have a minimum capacity of 500,000 tonnes/year, whilst 1m tonnes/year has been set as the bar for coal-to-methanol and coal-to-liquids facilities."

HSBC, as a result of all of the above, believes that only 20% of the 6m tonnes/year of CTO capacity due on stream in 2013-2017 is actually viable.

"The bank's findings are in line with our own investigation," said a source with a European petrochemicals producer. "We looked very seriously at investing in the CTO sector in China, but it didn't make any kind of economic or environmental sense."

If the sceptics are right, this would be excellent news for global olefins and polyolefins supply and demand balances over the next five to 10 years, and for exporters to China.

But these outcomes also, of course, depend on the greatest of all the unknowns - demand.

By: John Richardson
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